Why is everyone talking about Neil Woodford?

Who is Neil Woodford?

Neil Woodford is all over the news at the moment. We will explain why but first let’s take a step back and explore who he is and what he does.

Woodford is a fund manager. He is perhaps the best-known fund manager in the UK.

A fund is essentially a pool of investors money. Investors can buy a stake (share) in fund traded on the stock market. A fund manager takes the collective pool of money and invests it with a view to providing a return. There are different types of managed funds.

Some aim to grow the total value of the fund over time, thereby allowing investors to sell their stake at a higher price than the price they bought it for. Then there are income funds where the fund manager is making investments in an attempt to provide a steady stream of income.

Woodford has a reputation of investing for growth. He tends to invest in companies that are at an earlier stage in their life, with the potential to grow in the long-term.

Neil Woodford’s background

Oxford-based Neil Woodford rose to investing prominence at Invesco Perpetual who are one of the largest investment management companies in the UK. He spent 26 years at the company, becoming the head of investments and enjoyed a phenomenal track record of returns.

In 2014 he left the company to set out on his own. His management company Woodford Investment Management was formed and he began to establish his own investment funds.

Why is everyone talking about Neil Woodford?

Woodford manages three funds:

The LF Woodford Income Focus Fund. Launched in 2017 Woodfords company states this fund is designed to provide a “higher level of regular and sustainable income”.

The Woodford Patient Capital Trust. The company claim this fund invests in “disruptive early-stage companies”.

The LF Woodford Equity Income Fund – This is the first fund Woodford launched with the intention of providing growth and income.

The flagship fund, the one Neil is most re-known for is the LF Woodford Equity Income fund. It had featured in the Hargreaves Lansdown list of top 50 favourites and was popular amongst UK investors.

On the 3 June 2019 Woodford Investment Management announced that the dealing of shares in the fund would be suspended until further notice. This left institutions and private investors alike, unable to access the money they have invested in the fund.

What happened to Woodford’s funds?

The LF Woodford Equity Income Fund had been going through a bad run with investors seeing continued negative returns. A number of companies he backed had suffered from poor performance. This adversely affected the value and therefore share price of the fund.

An increasing number of negative news stories turned up the heat of Woodford and placed the performance of the fund firmly in the public eye. Investors began to grow frustrated with the lack of returns and became concerned about the growing level of risk. A flurry of investors withdrawing their money from the fund reduced the pool of money managed by the fund from ~£10bn to ~£3.7bn.

Kent County Council attempted to withdraw its £238m stake from the fund (part of their pension fund). Ultimately the fund took the decision to suspend dealing.

Why was there a problem?

Many of the investments the fund made were in unlisted companies. These are private companies not traded on the stock market. The problem with this is that selling them is a much longer process. With a public company listed on the stock market the share price is always available and shares can be sold quickly. With a private company it is a case of valuing the company, to determine the current share value and finding a buyer for the shares.

Being unable to quickly sell investments to raise cash left the fund struggling to meet the level of requests being made by investors to sell their stake. Woodford moved to suspend the fund, effectively blocking investors from withdrawing their money. It also prevents investors from buying into it.

He released a statement to investors of the fund saying he was ‘extremely sorry for putting you in this situation’ and he has thanked investors for their patience whilst he addresses the situation.

What next for Neil Woodford?

The latest news is that the Woodford Equity Income fund is likely to remain suspended until December. That means that investors won’t be able to access their money until then.

Woodford has come out to say he is currently working to rebalance the portfolio of investments the fund has. He is looking to move away from unlisted investments. Instead he is looking to rebalance the fund towards investing in listed companies such as those in the FTSE 100 and FTSE 250.

However, he has vowed to continue his strategy of investing in companies he believes to be undervalued and therefore present an opportunity for growth.

What can we learn from the situation?

Investing is a long-term strategy. As always with investing you shouldn’t be putting money in you will need back quickly. Even in cases where dealing isn’t suspended you may be forced to sell your stake at a bad time if you are investing money you will need back quickly.

It is also important to be clear on your investing goals. Do your research and when investing in a fund. Ensure you understand the strategy of the fund and the level of risk involved. Woodford has always been clear on what his strategy is and it is very much one of long-term growth. We can now see that this was too long-term for many of the funds investors.

It’s really important for investors to understand how a fund managers strategy aligns with their own goals. Avoid simply investing in a particular fund because it appears on a list of recommended funds. Always do your own research.

More to come

Expect a frequent flow of news stories about Neil Woodford in the months to come as he continues to re-position the funds investments. Despite the current situation Woodford still has decades of experience as an investment manager. Watching to see if he can turn the fortunes of his Equity Income Fund around will certainly make for fascinating viewing.

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